The present invention generally relates to investment portfolio management and individual security selection in the rebalancing of investment portfolios in a tax sensitive manner. More particularly, the present invention relates to a methodology and computer systems and programs designed to consider a particular investor's tax situation in the rebalancing of that investor's investment portfolio.
Investment advisers offer professional investment advice to investors through many different vehicles. One such vehicle is the separately managed account (“SMA”). A separately managed account is an individualized portfolio of securities that is owned and held directly by an investor and typically managed under the discretion of a professional investment adviser. To create a separately managed account, an investor works with an investment adviser to define an investor profile and to develop an investment strategy that reflects this profile, taking into account that investor's overall investment objectives and goals, risk tolerance levels and tax sensitivities. A typical SMA program may offer several pre-determined target portfolios from which participants may select, depending upon their investor profile.
Each target portfolio may contain allocations of securities from various market segments and sectors. The investor's SMA will contain individual securities that track the allocations of the selected target portfolio. Periodic rebalancing of the SMA is generally necessary to maintain the desired target portfolio allocation given that security values fluctuate over time. Generally, an investment adviser will rebalance an SMA on a regular basis such as quarterly and in the event that the imbalance of the SMA's portfolio allocations has exceeded a pre-set tolerance level. Rebalancing may also be required in the event that an investor's investment profile changes whether due to life events or otherwise.
Rebalancing or a change of the adviser's strategy, however, always involves the purchase and sale of securities that generate costs for the investor, including brokerage costs, administrative fees and taxable capital gains. Capital gains that are characterized as short-term under the US Internal Revenue Code are taxed at a significantly higher level than long-term capital gains. Generally, investors prefer to avoid taxable capital gains, particularly taxable short-term capital gains, in making investment decisions. Certain investors, however, have special tax circumstances that may cause them to seek the realization of capital gains or losses.
A number of investment systems and methods have been developed that are designed to assist investors in allocating assets within their portfolios and to help mitigate the costs associated with portfolio management, such as U.S. Pat. No. 6,484,151, entitled “System and method for selecting and purchasing stocks via a global computer network”, and U.S. Pat. No. 6,601,044, entitled “Method and apparatus for enabling individual or smaller investors or others to create and manage a portfolio of securities or other assets or liabilities on a cost effective basis”, U.S. Published Application No. 2002/0174045, entitled “System, method, and computer program product for cost effective, dynamic allocation of assets among a plurality of investments”, 2002/0138386, entitled “User interface for a financial advisory system”, 2003/0088492, entitled “Method and apparatus for creating and managing a visual representation of a portfolio and determining an efficient allocation”, and 2002/0138381, entitled “Individually managed accounts with multiple style allocations options”, and International PCT Published Application No. WO 01/31538, entitled “Investment advice systems and methods”, each of which is hereby incorporated herein in its entirety. None of these systems or methods, however, provide a decision overlay that is designed to assist investors in the rebalancing of investment portfolios by identifying specific securities for sale by their tax lots in order to fit within a pre-set tax tolerance. Accordingly, there is a need for a method and system for managing investment portfolios that provide investors with a decision overlay that identifies specific securities by their tax lot for sale in a manner designed to optimize the tax effects of the security sale with respect to that investor's individual tax situation.